Investigative storiesEnergy

Kostolac: Chinese loan, Serb rule-breaking

21 Jul 2016
Ilustracija: Đorđe Matić
To have a new block of the thermal power plant Kostolac B constructed and Drmno opencast extended, Serbian Government borrowed $608.2 million from the Chinese state bank, and committed to obey Chinese laws. A Chinese company is the main contractor for the works. Serbia failed to consult Romania, even though it was a must, while Serbian Administrative court passed a ruling that Serbian Ministry of agriculture and environmental protection had violated law with its approval of the Environmental impact assessment study.

Even though it publicly supports investments in renewable energy sources and reduction of emissions of harmful gases, Serbia is intensely working on construction of a new block of Kostolac B thermal power-plant which will be using the dirtiest form of energy production – lignite combustion. Except for construction of block 3, there is also a plan to extend the Drmno opencast.

High officials have been announcing this project for years as a capital investment necessary for stability of the overall energy system in Serbia. The works on Drmno are announced to be completed in 2019, while the new block is planned to be put in operation in 2020.

To have this job done, the state took a loan from Chinese Export-Import (Exim) bank, and secured the loan with its budget. The bank has the right to cede the contract on loan to a third party, while in case of a dispute, Chinese law is the applicable law. Chinese company China Machinery Engineering Corporation (CMEC) is the main contractor for the works on enlargement of the thermal power plant and opencast.

The international Energy community states they are still waiting for Serbian state aid control Commission to inform them whether, due to the Government collateral for the loan, the state aid was apportioned past set rules. Then it will be decided whether proceedings would be launched against Serbia.

Another issue for Serbia lies in the fact that Romania was not included in planning and preparation of the Environmental impact assessment study, even though the border between the two states is located only 19 kilometers from power plant Kostolac. The United Nations (UN) Economic Commission already passed the decision that Serbia needs to consult the neighbouring state.

Also, on 24 June this year, Serbian Administrative court passed a ruling which proclaimed the decision of the Ministry of agriculture and environmental protection on approval of the Study illegitimate. According to the ruling, the decision does not contain justification of reasons for not taking cross-border impact into account.

Even though the Ministry was claiming that the Study was valid for two years, it had already started preparing a new one even before the ruling was passed, after the old one had expired. The new study includes cross-border impact planning. Without the study, it would be impossible to obtain energy and construction permits, i.e. works may not commence.


Illustration – Present looks of the power plant Kostolac B and its new block, 19 km close to Romania

Chinese laws and arbitrage

The two already existing blocks of thermal power plant Kostolac B, each with 350 MW in power, are located on the right bank of the Danube, at some 90 minutes’ drive from Belgrade. They were started up in the end of 1980s, when exploitation of coal from Drmno opencast was also initiated.

Kostolac B and thermal power plant Kostolac A, which comprises two blocks with smaller power, cover some 14% of the total power consumption in Serbia on a daily basis.

In December 2014, the Government took a loan from the Chinese state bank Exim at the amount of $608.2 million, with 2.5% interest rate on annual level. For the first stage of the project – revitalization and reduction of sulphur emissions from the existing blocks of Kostolac B, Serbia had already taken a loan from the same bank, at the amount of $293 million.

Almost a million dollar for commitment fee

By 20 June, Serbia withdrew somewhat more than $71 million from the total loan amount of $608.2 million. Until that moment, the amount of commitment fee for unused loan paid to the Chinese bank amounted to more than $867.000.

The new loan will cover some 85% of the value of works on the new block within Kostolac B, which will also have 350 MW in power, and extension of capacities of Drmno coal opencast. The remaining 15% will be paid by Serbian Electric Power Industry (EPS) as the loan beneficiary, from its own funds, such funds including payments made by citizens for their power bills.

For the loan with the 20 year repayment period, the Government offered the budget as a guarantee that Serbia will observe all provisions of the Contract. At the same time, should the bank cede the contract to a third party, Serbia needs to accept it unquestioningly.

In case China and Serbia may not resolve a dispute amicably, arbitration in Peking will be in charge of possible issues, with Chinese laws as applicable laws. Both parties are obliged to observe every court decision – without the right to appeal.

Mahmud Bušatlija, advisor for infrastructural development and investments, says that the fact that few people in Serbia are familiar with Chinese legislation is an aggravating circumstance: “If it is said that arbitration would be conducted in China, after their laws, then you must be familiar with such laws”.

Mahmud Bušatlija, advisor for infrastructural development and investments (Photo: CINS)

Bušatlija explained that the conditions Serbia accepted are necessary so that it may take large loans: “You are offering budgets as collateral because you could not possibly get a loan otherwise (…) We are a country which carries a significant risk in business operations. We fall in the category of countries the debt of which needs to be easily dismissible should this (issue) occur”.

Without Serb sub-contactors

Back there in 2010, EPS and public company Thermal power plants and opencasts Kostolac signed the General agreement with Chinese company CMEC. The power plants became a branch of EPS later.

The agreement stipulates that CMEC will be the main contractor of works in both stages of the Kostolac B project and that procurement of goods and services from China will amount to at least 51% of the total value of the project. According to this agreement, sub-contractors in Serbia may not get more than 40%.

In November 2013, EPS and CMEC signed a contact on construction of a new block of the thermal power plant. The list of sub-contractors is given in Annex 5 of the contract, but it does not contain a single company from Serbia, while only two out of 15 suppliers are domestic companies.

EPS supplied Center for Investigative Journalism of Serbia (CINS) with just a part of requested documents on this business agreement. The missing documents include, among others, some pages of the General agreement from 2010, as well as Annex 1 of the contract from 2013.

The CINS journalist was also not allowed to examine complete documents in the course of public examination of the documents in EPS premises.

According to the agreement on economic and technical cooperation between Serbia and China from 2009, as well as according to the domestic Law on public procurement, public procurement is not obligatory in the case of international agreements.

Nemanja Nenadić, Transparency Serbia programme director, says that the question whether this arrangement is the most favourable option for Serbia remains open, and that there is no evidence on its cost-effectiveness: “Not only why the thermal power plant is cost-effective as such, but also in terms of the business with the loan and contractors determined in advance”.

Kostolac B thermal power-plant (Photo: CINS)

Milan Kovačević, consultant for foreign investments and a member of the Scientific Society of Economists in Serbia, says that the problem is that the business was “agreed directly, without any known arguments as to why such construction needs to cost that much”.

If the state offers guarantees for a project – as happened in the case of loan for Kostolac – this would have to follow an appropriate procedure, which means that the Law on state aid control needs to be observed so as to prevent companies getting in privileged positions.

According to the Energy community data, Serbian state aid control Commission is currently establishing whether state aid was illegitimately extended because of the guarantees for the loan for construction of Kostolac. When asked about this procedure, the Commission members referred CINS to Serbian Government, but the answers had not been received before publishing of this text. The Government officials did not accept an interview about the very contract on loan either.

Energy community, which is preparing Serbia for membership in the European Union (EU) in the area of energy, wrote to CINS that the decision on possible violation of the agreement on establishment of the Energy community will be passed once the Commission from Serbia supplies all information.

Serbia ignoring Romania

Having signed the contract on loan with Chinese Exim bank, Serbia took the obligation of obtaining all necessary permits for construction, and observing all legal procedures. This was confirmed by coming of the contract into force on 25 May 2015.

The Environmental impact assessment study addresses impacts of a project on human health and the environment, but it is also necessary for the purpose of obtaining energy and construction permits, as well as for commencement of works.

According to CINS interviewees, the Study for Kostolac, which was composed in 2013, had a number of flaws. Primarily, it did not take into consideration the vicinity of Romania, whose state border is located only 19 kilometers away from the thermal power plant.

Dissatisfied with the Study and the manner in which it was, as they said, illegitimately approved of, non-governmental organization Centre for environmental protection and sustainable development (CEKOR) from Subotica sued the Ministry of agriculture and environmental protection before the Administrative court in Serbia in May 2014. The first hearing was held only in the end of June this year, and it was not attended by anyone from the sued Ministry.

Sreten Đorđević, the attorney who represented CEKOR at the Administrative Court (Photo: CINS)

In its claim, CEKOR stated that the Study was approved in violation of the Law on general administrative procedure as the decision passed by the Ministry does not contain the fully determined facts. According to the claim, provisions of the Law on environmental impact assessment and international Convention on Environmental Impact Assessment in a Transboundary Context (Espoo Convention), according to which Serbia had the obligation of informing Romania about construction, were not observed.

The Espoo Convention was ratified by 44 states and the EU, while Serbia has been implementing it since 2007. Among other things, the Convention prescribes the procedure for energy facilities which may have significant impact on the environment of another state. The UN Economic Commission for Europe is in charge of implementation of the Convention.

In its reply to the claim, Serbian Ministry of environmental protection and EPS stated that there was no need for cross-border assessment, and proposed the court reject the claim.

However, a day after the hearing, the Administrative court passed a decision which annulled the decision of the Ministry to approve the Study.

Two years later, the state shows it was wrong

The Ministry of agriculture and environmental protection was supposed to submit the project to Romania, explain possible impacts, and offer the possibility of participating in the environmental impact assessment procedure already in the stage of planning. In April 2014, Romanian branch office of the international organization Bankwatch Network informed the UN Commission that it had not be done.

In November 2014, in her address to the UN Commission, Snežana Bogosavljević-Bošković, then minister of agriculture and environmental protection, said that Serbia had not implemented the Espoo convention as it believed that this was not about a new thermal power-plant, but a new unit of the already existing one. She also said that Serbia will later act in accordance with the Convention should the Administrative court rule so.

Several months later, Sabina Ivanović, person in charge of environmental impact of projects and activities, filed a new official letter to the UN Commission, stating that from the standpoint of Serbia the project could not have any negative impact on the environment. Still, she added that without implementation of the Espoo Convention it is not possible to exclude possible negative cross-border impact.

In the beginning of April 2015, the state of Romania also requested that Serbia implement the procedure, assessing that this project may have negative impact to its environment.

Drmno opencast (Photo: CINS)

Shortly afterwards, UN Economic Commission concluded that Serbia had not fulfilled its obligation and order it to urgently contact Romania; the decision whether Espoo Convention was violated is still pending. In March this year, the Commission also launched the process of examining the procedure in terms of Drmno opencast.

In the end of June, four days before the Administrative court passed its ruling, the Ministry initiated the process of composition of a new Environmental impact assessment study, as the old one had already expired. This time, Serbia took the obligation of conducting cross-border assessment.

CINS journalists asked the Ministry for an interviewee on this topic; still, instead of an interview, they received an official letter in which the Ministry states its position on construction of Kostolac.

When asked an additional question – why they initiated composition of a new Study when they had been claiming, for two years, that this was not necessary and that they would wait for the decision passed by the Administrative court – the Ministry did not provide a reply.

Aleksandar Antić, minister of mining and energy, also rejected an interview, while EPS representatives provided their answers to the questions asked in writing. Among other things, they stated that works on preparation of technical documents, clearing of the site and archeological research are currently underway.

The research was conducted with participation of Roxana Jipa from RISE Project Romania


About the harmful effects of construction of the new block of Kostolac thermal power plant on the environment and health of inhabitants of adjacent settlements read HERE



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